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What we believe – Without placing value on knowledge assets, there is no way to build a knowledge based economy.

What we want – A successful strategy for growth recognising the fundamental importance of intangible assets.

What we need – Policies framed in a way that actively encourages and rewards investment in the ‘fruits of innovation.’

What we advocate:

1. Leverage IP investment: recognise value in intangible assets

Historically, banks have ignored intangible assets on company balance sheets. In response to the 2013 Banking on IP? report, Business Secretary Vince Cable rightly said that

“intellectual property is too important an asset to be undervalued by banks, as the main source of finance”.

Lenders must be encouraged to stop drawing a red line through investments in knowledge, especially when compelling evidence is emerging that companies with IP and intangibles grow faster, and are safer bets, than those without them.

2. Enable core IP to be used as collateral for lending

Current capital adequacy rules aimed at ensuring banks are robust have an unintended consequence. They drive banks to prioritise assets like property that are supposedly well-understood; but as well as well as being at the root of the last global recession, these are assets knowledge-based businesses don’t really need or use.

Steps must be taken to break this vicious circle. Banks need support from regulators to find acceptable ways to associate collateral value with ‘good’ IP. Only then will banks be able to fulfill their mission of lending more while staying safe.

3. Help new ideas take off: raise EIS tax relief to 40%

Disruptive new ideas often require seed funding to get them on the road to growth, beyond the financial support friends and families can provide. By definition, this sort of investment carries very high risk, so to provide an incentive, the Enterprise Investment Scheme (EIS) allows private investors to claim income tax relief of 30% on the cost of new shares.

The last government increased the rate of relief from 20% to 30% in 2011, but most ‘angels’ pay higher rate income tax. To boost investment, we think the next Government should go further and make EIS relief equivalent to the higher rate, namely 40%.

4. Get IP into the secondary curriculum

In too many contexts, including education, IP is seen as a specialist legal topic. For the UK to be a competitive global force in knowledge, this is not good enough. We should all have at least a basic grounding in what IP is and why it matters, and this will be most effective if it starts in our schools, when consumption of copyright material really begins.

As a starting point, IP must be referenced in all ‘A’ level qualifications that have anything to do with business & economics, design & technology and the media. We’d ultimately like to see a more pervasive approach that helps students gain an informed view on how it influences lives and livelihoods.

5. Encourage derivative works, not rip-offs

For our creative and digital industries to remain globally competitive, continuous innovation is vital. We must preserve incentives to innovate by ensuring that a reasonable degree of control can be exercised over content.

As set out in our recent report for the IPO, Penalty Fair?, more substantial penalties for criminal acts of online piracy are needed. However, these should be balanced with practical measures to open up legal content access so that others can innovate. The Copyright Hub should be better resourced so it can go further and faster.

6. Keep properly targeted tax breaks for IP

Not long after it was announced with a fanfare, it seems clear that Patent Box will not continue to operate as now for much longer. Whilst we understand the need to address ‘profit-shifting’, we think the focus on IP is justified and that it needs to continue.

Politicians need to understand and defend the fact that ground-breaking IP can and should create benefits that are not simply proportionate to its cost, and not be backed into absorbing it within a modified R&D Tax Credit regime that only takes expenditure into account.

7. Insist on better IP record-keeping

One of the barriers to IP trading, and the use of IP as security for lending, is that formal records of ownership are not always reliable.

While supporting the voluntary initiatives now under way to improve it, we believe there is a strong case for requiring companies to keep official IP registers properly up to date.

Wherever a business uses specialist knowledge to serve its customers, its activities will have intellectual property (IP) at their core. This IP might lie in “formal” rights like patents, designs or trademarks; increasingly, in a service-driven economy, it is likely to involve proprietary processes, trade secrets and copyright material.

But IP poses companies with a common problem, wherever it may lie. While a business’s bundle of IP assets often underpins all its income streams, its worth is seldom expressed on a balance sheet. Since the underlying IP is hardly ever identified or valued, it cannot be exploited in the same way as tangible assets like property, plant and machinery – assets whose importance is reducing in an increasingly knowledge-based age.

Understating a business’s value in this way inevitably curtails its ability to borrow and to fund growth, a problem that is widely recognised in industry and Government circles. For example, at its February 2007 seminar on SMEs and their intangible assets, the ACCA summarised the position as follows: “Impetus must be given to developing an accepted valuation methodology and to stimulating intangible asset markets… It is imperative that a methodology is developed that values intangible assets so as to promote innovation within firms and the economy as a whole1” In February 2008, the DCMS paper Creative Britain concluded that: “Since most of the value of the creative sector derives from intangible assets, creative businesses must be able to value them accurately and have confidence that they will be vigorously defended under the law2.”

The way forward

There is no legal impediment to deriving greater shareholder value from IP. As its name suggests, IP is essentially a type of property, which means it can be licensed, bought and sold (or, technically, assigned) in much the same way as any tangible asset. However, to enable this potential value to be realised, two key preconditions need to be met.

Firstly, the IP’s scope and nature need to be clearly understood. This requires there to be an accepted means of describing and “commodifying” it – in other words, to transform the IP into a business asset with a separate identity, capable of being transferred to other parties. Secondly, the IP needs to have a financial value attributed to it.

Inngot’s system has been designed to overcome these two barriers. It provides new processes to explain what a company’s IP is, where its value lies, and how much it might be worth. In doing so Inngot also enables companies to make their IP known to a wide range of prospective customers, partners and investors.

With the help of Inngot’s registration and valuation regime, IP can be sold to a finance house, which then leases or licences the exclusive usage rights back to the originating business, in return for a monthly payment stream.

Inngot registration

Inngot’s systems exploit the potential of existing copyright law to create a secure environment where businesses can register and publish their IP. A unique new classification system is used to describe both the business and its IP, making it easy for potential customers, collaborators, acquirers and financiers to search for it. This is the opposite of existing copyright registration schemes, which effectively “lock away” published material.

As well as registering the IP, Inngot records the existence of any finance associated with it, creating a “notice mechanism” needed for a market in IP to prosper.

Inngot valuation

While IP valuation is conducted regularly, it is usually a “one-off” exercise in the context of a business sale or licensing agreement. Comparatives are rarely available and seldom published.

Inngot’s valuation mechanism has been created with a standardised transaction form in mind – an “arm’s length” sale to a finance house. In this context, the importance of the valuation is that the amount involved must be realistic; the asset must be worth at least the amount being lent (having factored in an appropriate contingency); and the lessee must have the ability to repay on the agreed terms.

Benefits

For companies, using IP as security provides a means to maximise the value of existing core assets without having to sell shares. All of the exclusive rights of usage remain with the originator, who can continue to develop its IP just as it would previously have done, but with the benefit of significantly more capital.

Asset finance always involves a fixed stream of payments over a given period of time, likely to compare favourably with variable bank charges. At the end of the term, a lease can revert to a “peppercorn” rental, while a licence can provide for full ownership to be returned at the end of the term. In the meantime, the fact that the legal ownership of the IP rests with a major financial institution significantly reduces the risks of deliberate infringement by a competitor.

Entering into a lease agreement does not “fix” the value of the IP, any more than the size of a mortgage determines the value of a property. If the business does well, the value of the IP will increase, opening up opportunities to realise further funding streams. This also suits the lender, as it prevents them from becoming technically “over-collateralised”.

The way forward

There are a growing number of commercial finance precedents where IP has been used to provide security for lending, and the mechanisms involved are familiar and well understood. As the marketplace develops, many of the techniques already developed in a competitive leasing market will start to be introduced, such as extended primary periods, payment holidays, peppercorns for secondary periods, and even (potentially) “balloons”. There are already signs that finance houses and brokers will develop specialisms in one or more sectors or IP types, as they have done for many years with tangible assets.

Inngot registration and valuation address the structural issues which have constrained the use of IP as security for finance to date – chiefly the lack of clear description, valuation and notice mechanisms. With these points addressed, IP-based financing becomes a very attractive option both for innovative companies and for finance companies.

The Sollomon valuation system helps proprietors and licensees to understand and agree the value of intellectual property and intangibles for licensing purposes and equity distribution.

Concrete Canvas Ltd manufactures a ground-breaking material which allows concrete to be used in a completely new and far more efficient way. The patented technology was originally developed for the company’s award-winning Concrete Canvas Shelters, a “building in a bag” that requires only water and air for construction.

Concrete Canvas products are sold to large construction firms, utility and infrastructure providers such as Network Rail, the Highways Agency and the National Grid, local authorities and military organisations all over the world, with exports accounting for 80% of sales. Orders are, as CEO Peter Brewin is happy to report, “off the scale!” and the company’s current focus is on expanding its production capacity.

Concrete Canvas first used the Sollomon valuation tool following an introduction by the Welsh Government in 2010. It conducted a new valuation in 2011, as supporting evidence for an updated company valuation when the company was putting a new share incentive scheme in place.

Peter Brewin sees the valuation as being useful in many different scenarios. He has used it when agreeing a licensing deal with the company’s US partners, and adds, “I also found it helpful to be able to send a report round to investors in Concrete Canvas, so that they can see the value of the product they have helped us to create.”

Peter concludes, “Inngot are a friendly company who offer excellent customer service and provide an efficient yet robust way of valuing intangible assets.”

A new report, authored by Inngot for the ‘EcoMind’ cross-border initiative co-funded by the EU, has just been published. It investigates the IP challenges and solutions of most relevance to sustainable innovation.

EcoMind is a programme to support sustainable business growth and the development and market introduction of new, environmentally friendly products and services. One of the issues identified during the programme’s activities was the importance of obtaining sound commercial advice on intellectual property matters, particularly when bringing new products to market.

In order to produce actionable, evidence-based conclusions and guidance, Inngot conducted an intensive research exercise aimed at establishing the IP strategies being adopted by eco-innovators and the challenges and opportunities these present. This involved a combination of one-to-one interviews, secondary research and primary survey data (conducted online amongst the EcoMind membership, with support from the Environmental Sustainability Knowledge Transfer Network).

The report, Intellectual Property and Eco-innovation for Small and Medium Businesses, identifies key challenges faced by the sector, addressing in particular patenting, copyright and the alternative approaches often used to protect IP by preserving secrecy. It also highlights five aspects for eco-innovators to consider when formulating their IP strategy.

EcoMind has a strong focus on practical support. Accordingly, the final two pages of the report provide a list of 10 key questions, derived from the topics highlighted by Inngot’s research, and a “flowchart” to assist entrepreneurs in deciding which IP protection strategy is likely to be most appropriate for them.

EcoMind is led by BSK CIC and co-funded by the European Union under the Interreg IVA 2 Seas Cross-Border Programme 2008-2011.

Martin Brassell, CEO of Inngot, considers how founders can realise value from their hard work in a pre-start context

There are many areas in which expectations differ between investors and entrepreneurs seeking investment. One of the areas that often proves hardest to resolve is the question of valuation, especially if a business is yet to generate first revenues.

‘Sweat equity’ is the delightful term coined to describe the value to be placed on the efforts expended to bring an opportunity to the point of realisation. At the point when a business is first presented to independent investors, rather than a more receptive first audience of ‘friends and family’, entrepreneurs will often strive to place a financial value on their labours. From their viewpoint, this is a perfectly reasonable thing to do: after all, no-one doubts that bringing an innovative idea to market involves a lot of perspiration as well as inspiration.

Any investor worth having knows that the road to success is generally a steep one, and likely to require a good deal more sweat to be expended. He or she also understands that it is counter-productive to leave a founder so short of equity that they lack the commitment and energy to make the climb. However, the risk climate dictates that this is a buyer’s market at present, in which any valuation is bound to be subjected to close scrutiny, and needs to be as objective and well-evidenced as possible.

How does sweat get expressed? Generally as a factor or multiple of the salary that the entrepreneur(s) would be earning if they were in some notionally equivalent employment (or still in a previous job). The more senior time and energy put into an opportunity, the more it should be worth, and this method quantifies it – right?

Sorry – wrong, on a number of counts. To begin with, this approach assumes that hard cash and theoretical cash are equivalent in value. In reality, there is always an exchange rate in action. Sometimes this works in the founders’ interests, if they manage to get an opportunity to a point where it clearly has vastly more value than the time they have expended on it would indicate. But on other occasions, the investor is being expected to put in new cash to realise an opportunity that the theoretical cash has failed to deliver on its own. They will understandably take the view that their ‘real’ money is more risky and should attract a premium.

Even if a pound-for-pound calculation were appropriate, an investor has no way of auditing the amount of time that has actually been invested, or knowing whether the salary sacrifice implied is real or not. Certainly, people do sometimes jump out of highly paid jobs to create new ventures: but on some level, the saying that “necessity is the mother of invention” is generally applicable to entrepreneurial motivation as well as to the innovations themselves. And there is a more fundamental problem, which is the underlying premise that cost is equivalent to value.

Plainly, it’s not. The fact that it costs one company twice as much as another to produce a given widget does not translate into 2x value that the market can see. To take a less obvious example, many endeavours involve going down a number of what prove to be blind alleys. This creates ‘negative know-how’ – understanding what doesn’t work. It has some value, but clearly not as much as actually discovering the ‘secret sauce’.

To present a more compelling case requires a focus on what a pre-startup has actually been able to deliver to date. This involves consideration of assets, and since few start-ups are well enough funded to invest much in tangible ones, it inevitably comes down to the value that an investor can see in the opportunity and the company’s capacity to realise it based on a) the quality of the team (if there is one) and b) the quality of the approach embodied in its intangible assets.

An investor needs to see how the sweat invested by founders has translated into assets that create income, ‘freedom to operate’ and/or ‘barriers to entry’. Not all these assets are equal, and the type most highly prized will generally firm orders, often in short supply. However, any such orders are likely to have been secured based on capabilities that are underpinned by intellectual property and similar rights.

The more comprehensive an inventory of assets a business can produce, the better its prospects of attracting favourable attention, and the more likely it is that an investor will see that there is something of value at the heart of it. The present day value of those assets can then be extrapolated from the scale of the opportunity they enable a company to realise, and the length of time it will take for an investor’s new money to enable that opportunity to start to be realised. This comes down to having a credible and well drafted business plan, in which the risks and their mitigants are given proper consideration.

So the secret of expressing the value of sweat is simple: don’t focus on how much time you’ve spent – instead, show what you have been able to do with it.

Individuals value their intellectual property for many reasons; whether it’s getting started, becoming established in your business sector, looking to grow through funding and investment, finding partners, identifying their intangibles or valuing their intellectual property.
Inngot’s online IP valuation tool will help you unlock the value in your innovations. Called Sollomon, it’s quick and confidential, and it takes all your intangibles into account – not just patents.
Valuing intellectual property can therefore be helpful for people who may be specifically looking for IP funding, IP investment, partnerships, collaboration or other business opportunities.
This video gives you a quick overview of the user friendly process and how the online tool can be completed with minimal efforts. You will only need a few pieces of information to get started and the certificate is generated instantly; allowing you to benefit immediately from you added value from identifying your intangibles.

Traditionally, “innovation” has been viewed as being synonymous with scientific discovery and the development of new physical products. Accordingly, it has been measured using established yardsticks such as research and development expenditure and patent production.

However, in the UK, the service sector now counts for over 75% of added value, and technical development is often realised in software, which is seldom patentable. This changing economic emphasis has led to a growing acceptance that traditional measurements, and traditional approaches to intellectual property (IP), no longer reflect how innovative any given company or sector actually is. In July 2008, DIUS asked NESTA to launch consultation on a new Innovation Index, on the basis that innovation “now encompasses not only the development of new components and products but new services, technical standards, business models and processes.”

As the legal means to protect “literary works” of all kinds, including software, copyright is the type of IP that is arguably most vital in understanding and developing the UK’s knowledge economy. The drive to exploit this automatic right more effectively is being led by Inngot, a private venture, which is launching a new service to register and publish copyright material. It enables innovative businesses to use their IP to attract customers, find collaborators, and secure finance and investment.

Inngot’s views coincide with the conclusions of the far-reaching Gowers report into IP policy, commissioned by HM Treasury and published in December 2006. Rather than extend monopolistic patent rights into software and business models, this recommended (among other measures) that government agencies should collaborate with others to improve the coverage of copyright.

The versatility of copyright

The principal reference point for current UK copyright law is the Copyright, Designs and Patents Act 1988 (“the Act”). According to the Act, copyright automatically arises when an original work is recorded, an approach which is mirrored in most other markets, and lasts for up to 70 years. Where copyright material is created in the normal course of business activities, it generally belongs to the employer by default (and there are no moral or other rights provided in law for the creator of any computer-generated material if they work for someone else).

Under the provisions of the Act, software has the same protection as other written work. Strictly speaking, this level of protection covers the expression of an idea, rather than the idea itself. However, the two concepts are not mutually exclusive; in the case of software, the expression of an idea in code is what gives it an effect. Moreover, it is not only lines of code that can be protected – tables and compilations are specifically included in the scope of the Act, and even diagrams can also count as original artistic works.

As a type of property right, copyright can be fully or partially assigned (i.e. sold) to another party. It can even be assigned before it has been recorded, creating an entitlement to work which has not yet been created. While this practice is most familiar in the context of book advances, it could prove equally applicable to software.

Copyright infringement

A copyright owner whose copyright has been infringed has a right to damages, and can take out an injunction to prevent further breaches. Under the Act, a copyright infringement by a company that occurs with the consent or connivance of a director or manager of a business can also make them personally liable for damages.

However, if the infringing party did not know, and had no reason to believe, that copyright existed in a work then there is no entitlement to damages. This provides a vivid example of the importance of publicly asserting copyright in any original work, so that it falls clearly within the scope of the law (and another benefit of registering and enquiring with the new Inngot register).

In addition to a “fair use” exemption for purposes such as legitimate research, copyright is not deemed to have been infringed unless a substantial part of a work has been copied. However a part may be “substantial” because it represents the most original and distinctive aspect of a work – the calculation is not simply one of volume, and case law has established that even a very small part of an original work can prove to be substantial in this context.

One popular misconception is that copying needs to be literal (i.e. word for word) in order for there to be an infringement. This is not necessarily the case: copying can also be demonstrated where it is not literal, provided that the material in question is expressed in the work and is not merely an idea (for instance, the plot of a literary work can be protected by copyright as well as the words on the page which explain it).

This is an interesting precedent which demonstrates that software, as a “literary work”, could also enjoy copyright protection if the substance of its code is copied, even though the exact form of words may differ.

Inngot in the knowledge economy

Whether they are seeking to assert their rights to copyright material, or trying to ensure that they are not in breach of existing copyright, knowledge economy businesses have been disadvantaged by the lack of a trusted central repository for “unpublished” material (i.e. copyright material that is not on general release).

Inngot addresses this by providing a common language to describe innovative businesses and their IP, and by publishing it in a secure environment protected by copyright. In doing so, it provides the significant benefit that a business can assert its ownership of specific IP without the downside risks of detailed disclosure – which is a statutory requirement prior to receiving patent protection.

Inngot does not duplicate the statutory registration regimes for patents and trade marks. By contrast, it harnesses the flexibility and dynamism of copyright to enable software and service businesses to express what makes them special.

Intellectual Property has too long been seen as a guard against imitators and should be better used forging partnerships and raising valuations, Sean Hargrave Discovers.

There are two major problems with the way the business world considers intellectual property (IP). Many companies see a patent, trademark or registered design mainly as a defensive measure and so will not look beyond these protective rights and consider what other IP the business might own.

Intellectual property is about much more than just patents and your firm must protect these assets, writes Martin Brassell, chief executive of Inngot

To get an idea of the strategic importance of “intellectual assets” in general, take a look at how value is assigned to FTSE 100 companies. Back in the 1980s, market capitalisation and balance sheet asset values followed each other closely. But look at the top businesses today and you will find that up to 80% of their value no longer relates to “hard assets”. The difference is accounted for by a whole range of intangibles, which need to be properly protected.

Much of the debate around copyright law is currently focused on its (in) ability to protect artists’ original works, at a time when their predominantly digital format makes rip-offs easier than ever. But copyright is also a fundamental right for software of all kinds, versatile and wide-ranging – and as well as ensuring your business benefits from it, you need to ensure you don’t fall foul of it either.

At first sight, it may seem incongruous that the law treats software in general as an “original literary work” – but in fact it’s very appropriate, considering that code is now often constructed using language that even non-programmers can recognise. And it covers more than you might think. Tables and compilations are covered under the relevant law (Part I of the Copyright, Designs and Patents Act 1988), as well as lines of computer code. Your basic rights as a copyright owner include copying (no surprise there), public sale, performance, broadcast and adaptation.

Interestingly, “adaptation” includes conversion into a different computer language or code – so it’s not acceptable for someone to “translate” your software and claim it as their own. And all these rights apply to the whole work, or any substantial part of it. Case law (for instance in the context of recorded music) suggests that a “substantial part” can be a pretty small element, if it is distinctive of the work as a whole.

International copyright development and the concept of fair use

Of course, no form of intellectual property protection really safeguards an idea, because copyright, patents and designs don’t prevent someone designing around your innovation (in fact it’s worse than that – a patent discloses exactly how you’ve created something, thereby making it easier for others to design around your work). But in software, more than any other creative domain, it can be perhaps argued there is no longer a clear distinction between the expression of an idea and the idea itself.

A great benefit of copyright is that it is very long-lasting. In the case of software, the clock starts ticking when the code is first written, and the alarm doesn’t go off for up to 50 years, so your market opportunity will have run out long before your protection does. Best of all, the rights exist automatically in a work once it is first “recorded” – there’s no need for statutory registration in order to get legal protection.

However, it is very important to draw attention to your copyright at every opportunity, and not just to put people off from copying you. You need to preserve all your rights, including damages and injunctive relief, in case someone infringes your work. If an offending party does not know, and has no reason to believe, that copyright exists, your right to damages is lost (this is where the absence of formal registration has its downsides, and is one of the areas we are seeking to remedy with Inngot.com).

Not necessarily. If all development has been done in-house by employees of your business, there should be no issue. Under the Act, literary or artistic works made in the course of employment generally belong to the employer, in the absence of any agreement to the contrary, and computer-generated works don’t provide for a “moral right” to be identified as an author.

However, you will need to be confident that your developers haven’t “borrowed” chunks of code they’ve previously created for other people, or lifted them from any other application that is subject to someone else’s copyright. If they have, be aware that if any offence is committed by a company with the consent or connivance of a director, manager or company secretary, then you too can be found guilty of infringement.

The most common problem arises when a business wants to sell off work which has been done in whole or in part by subcontractors without providing for transfer of copyright ownership. This shouldn’t be difficult, since the law allows for copyright to be assigned even before any code has been written. The problem is more often a practical one; if some dispute arises over the quality or timeliness of the work done, the subcontractor has an incentive to hold the rights as hostage in order to extract payment.

Overall, though, the great appeal of copyright is that it is designed to protect goods that are meant to be sold. And in the case of digital media sales, it’s not the law that needs fixing: it’s the business model that’s broken.

Martin Brassell is CEO of Inngot.com, a new online marketplace that enables companies to publicise their IP, including copyright protected software, in a secure environment and use it to find customers, partners and funding.